'I’ll make my own lunch to get first home loan': Can you pass the five stress tests to get a mortgage?

Get ready to put your finances through the ‘stress tests’ - because you won’t get a mortgage or be able to remortgage without passing them.

The major checks were introduced last month as part of the tough new ‘responsible lending’ regime to make sure you can repay a home loan – and the results can be a shock.

Everyone applying for a mortgage is quizzed on everyday spending from takeaways to childcare to check that they can afford loan repayments now – and when interest rates rise.

Meal deal: Sarah Heath is willing to save

I’LL MAKE MY OWN LUNCH TO GET MY FIRST HOME LOAN

Taking the stress test has given potential first-time buyer Sarah Heath the confidence to know she can afford a mortgage if interest rates rise – but she still fears she will never get accepted for a loan.

‘Like a lot of people my age, I am in a house share as I save for a deposit,’ says Sarah, 28, who lives in Gloucester and works – partly from home – for an internet firm in Reading.

‘I do sometimes struggle at the end of the month but when I went through my bank account I realised how much went on clothes, entertainment, my gym and buying lunch every day.

‘It showed I could easily afford an extra £200 or £300 a month if I cut back on non-essentials, by making my own lunch or taking in a lodger.’

Her fear is that lenders will assume today’s spending is set in stone.

Sarah is not alone. Almost seven in ten potential first-time buyers think the new affordability tests will freeze them out of the housing market in the near future.

Sally Laker of broker Mortgage Intelligence in Bournemouth says: ‘Interest rates have been at a record low for more than five years and a stress test can show just how vulnerable you might be when they do eventually head back up.’

A stress test is straightforward. Just take the size of the mortgage you want and see how much it would cost according to a range of different scenarios using the Mortgage Monthly Interest calculator at our sister website thisismoney.co.uk.

Here are the five most important tests to take – including the final ‘nightmare scenario’ that will resonate with anyone who had a mortgage in the 1980s or early 1990s.

1) A SMALL INTEREST RATE RISE

The Bank of England cut the base rate to 0.5 per cent in March 2009 and it has stayed there ever since.

Last week, Governor Mark Carney suggested that interest rates would not rise in the near future, despite fears of a housing price bubble and falling unemployment.

And he has said that any rises would be ‘gradual’ – possibly starting with a nominal quarter percentage point increase.

But experts say that a second rise could follow fast, so it is best to test for a half percentage point rise.

If that happened, a first-time buyer with a typical repayment loan of £119,000 would have to pay about £33 a month extra.

2) FORCED ON TO STANDARD VARIABLE RATE

In an ideal world existing borrowers would move from one best-buy mortgage rate – usually fixed – to another every time their deal expired.

But the tough new qualification rules from the Financial Conduct Authority mean that many borrowers may have their applications rejected and will be forced to go on to their existing lender’s standard variable rate (SVR). These are usually more expensive and can go up if the Bank of England’s base rate rises, or just at the whim of the lender.

Today’s SVRs vary between 3.69 per cent with First Direct to 6.08 per cent with Kent Reliance Banking Services – and lenders have a habit of raising SVRs faster than rises in the base rate.

So if the base rate goes up by half a percentage point your SVR could go up by 0.75 of a percentage point.

Move from a best-buy two-year fix at 2.25 per cent to an inflated SVR of 6.75 per cent and you will need to find an extra £303 a month for a typical first-time buyer’s £119,000 mortgage.

3) COULD YOU AFFORD A JUMP TO 7 PER CENT?

This is the most controversial test the watchdog wants lenders to apply – and borrowers can be turned down for new loans or remortgages if their current spending patterns mean they would struggle to afford the higher repayments.

George Charles of discount website VoucherCodesPro says: ‘Our research shows most hopeful borrowers can find an extra £200 or so a month by cutting back on non-essential spending.’

But this may not be enough to satisfy lenders. On our £119,000 loan you would pay £519 a month if you were able to secure a best-buy 2.25 per cent rate – but you may need to prove that you can find £841 a month for the hypothetical 7 per cent loan.

4) MOVING FROM AN INTEREST-ONLY LOAN

New rules look set to outlaw interest-only mortgages on residential loans (buy-to-let investors can still have them).

So if you are on interest-only terms now you may have to switch to a repayment mortgage when your current deal ends – and that can be eye-wateringly expensive.

Go from an interest-only deal on a £119,000 loan at 4 per cent to a 20-year repayment deal and your monthly costs will rise by £325 – even if your rate stays the same.

Get more examples at the new Interest-Only Mortgage Time-bomb calculator at This Is Money.

5) THE NIGHTMARE OF A5 12 PER CENT INTEREST RATE

Nobody is predicting a return to the 1980s or early 1990s, when the base rate topped 13 per cent – and the actual rate paid on many mortgages was even higher.

But a quick look at likely payments at this level is a useful wake-up call for anyone stretching their finances too tight.

That affordable £119,000 mortgage costing £519 a month on a two-year fix of 2.25 per cent today would cost £1,253 a month at a 12 per cent rate.